Luk Fook Holdings delivered strong 1QFY27 same-store sales, but mainland China store closures progressed faster than expected

Overview

This report is Goldman Sachs' commentary on Luk Fook Holdings 0590.HK's 1QFY27 operating update. The company released its June-quarter operating data on July 16. Same-store sales growth was broadly in line with Goldman Sachs' expectations, with Hong Kong and Macau outperforming mainland China, and gold products sold by weight continuing to lead. At the same time, mainland China posted a net closure of 150 stores, with the pace of closures becoming a bigger market focus and offsetting some of the positive signals from the sales recovery.

Core views

Goldman Sachs' core view is that Luk Fook Holdings' sales recovery remains solid, especially with strong same-store sales growth in Hong Kong and Macau and a clear recovery in gold products; however, the mainland store network continues to shrink, recovery in fixed-price jewelry is uneven, and the upside from the target price versus the current price is limited, so it maintains a Neutral stance. The report also believes Chow Tai Fook's upcoming 1QFY27 operating data may show a similar pattern, with Hong Kong and Macau stronger than mainland China and gold products outperforming fixed-price products.

Analysis framework

The report mainly assesses the quality of the operating recovery through same-store sales growth, regional breakdowns, product-category breakdowns, net store openings/closures, and comparisons with Goldman Sachs' expectations and pre-pandemic levels, while also estimating the target price based on target P/E multiples and peer discount.

Methodology notes

• Valuation methodsTarget P/E method

  The 12-month target price is based on an average target P/E of 7.5x FY3/27E

  Goldman Sachs uses a 7.5x FY3/27E average target P/E and applies a 40% discount to Chow Tai Fook to derive the 12-month target price of HK$25.

• Operating analysisSame-store sales growth analysis

  SSSG split by region and product category

  The report separately examines same-store sales growth in mainland China, Hong Kong and Macau, self-operated stores, franchised stores, gold products, and fixed-price jewelry to judge the breadth and quality of the recovery.

• Factor frameworkGS Factor Profile

  Comparison of growth, financial returns, valuation multiples, and composite percentiles

  Goldman Sachs' factor profile compares the stock against covered stocks and industry peers, providing its relative positioning across growth, financial returns, valuation multiples, and composite dimensions.

• M&A frameworkM&A Rank

  M&A Rank 3

  M&A Rank 3 represents a low probability of being acquired, about 0%-15%, and is usually not included in the target price.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Luk Fook Holdings(0590.HK)

  Subject company and rating target

  Strengths

  Strong same-store sales growth in Hong Kong and Macau, standout recovery in gold products, and a relatively high FY27E dividend yield.

  Weaknesses

  The net number of store closures in mainland China was higher than expected, fixed-price jewelry performed weakly in mainland self-operated stores, and FY27E EPS growth is close to flat.

  Comparison

  The target price methodology applies a 40% discount relative to Chow Tai Fook; the report also compares the company with the Greater China retail coverage universe.

  Risks

  Pace of same-store sales recovery, rental cost reductions, mainland Chinese tourists' destination preferences, China tourism policy, and gold price and foreign exchange fluctuations.

• Chow Tai Fook Jewellery Group

  Comparable company and operating read-through target

  Strengths

  1QFY27 same-store sales in mainland China and Hong Kong/Macau are expected to be similarly solid, with Hong Kong and Macau likely outperforming mainland China.

  Weaknesses

  The sustainability of subsequent growth and the increase in fixed-price product mix still need to be verified.

  Comparison

  Luk Fook's sales mix provides a reference for Chow Tai Fook's July 23 operating data.

  Risks

  If 2QFY27 growth slows or the fixed-price product mix improves insufficiently, market confidence in the jewelry retail recovery may weaken.

Key data

• 12-month target priceHK$25.00Based on a 7.5x FY3/27E average target P/E, at a 40% discount to Chow Tai Fook.
• Current priceHK$23.00Price disclosed on the report cover page.
• Implied upside8.7%Calculated from the target price of HK$25.00 relative to the current price of HK$23.00.
• RatingNeutralThe report shows a NEUTRAL rating since October 7, 2024.
• Hong Kong and Macau 1QFY27 same-store sales growth+41% yoySlightly below Goldman Sachs' expectation of +45%, about 78% of the normal level in the June quarter of 2018.
• Mainland China self-operated store same-store sales growth+16% yoyBroadly in line with Goldman Sachs' expectation of +15%, and 5% above the pre-pandemic June quarter of 2019.
• Mainland China franchised store same-store sales growth+25% yoyAbove Goldman Sachs' expectation of +22%, about 19% above the pre-pandemic level; franchised stores account for about 91% of the mainland store network.
• Net store closures in mainland China150 storesA net closure of 150 stores in the June quarter, higher than the net closure of 71 stores in the March quarter, and reaching Goldman Sachs' previous expectation of 150 net closures for 1HFY27.
• Hong Kong and Macau gold products same-store sales+55% yoyReached 103% of the normal level.
• Hong Kong and Macau fixed-price jewelry same-store sales+15% yoyReached 48% of the normal level.
• Market capitalizationHK$13.5bn / US$1.7bnDisclosed in the report's Key Data.
• Enterprise valueHK$17.8bn / US$2.3bnDisclosed in the report's Key Data.
• 3-month average daily turnoverHK$24.9mn / US$3.2mnDisclosed in the report's Key Data.
• FY27E revenueHK$20,799.6mnGoldman Sachs forecast.
• FY27E EPSHK$3.46Goldman Sachs forecast.
• FY27E P/E6.7xGoldman Sachs forecast.
• FY27E dividend yield6.8%Goldman Sachs forecast.

Impact & implications

The report's investment implication for Luk Fook Holdings is relatively balanced: strong same-store sales and recovery in Hong Kong and Macau support earnings resilience, but mainland store closures, divergent recovery in fixed-price jewelry, and gold price/FX volatility limit re-rating potential. For peer Chow Tai Fook, Luk Fook's operating data suggests Hong Kong, Macau, and gold products may continue to outperform other categories, but the market will focus more on whether 2QFY27 growth is sustainable and whether the strategy to raise the fixed-price product mix can be delivered.

Risks

• Same-store sales recovery is slower or faster than expected.
• Rental cost reductions are slower or faster than expected.
• Changes in destination preferences among mainland Chinese tourists.
• Changes in China's tourism policy.
• Gold price and foreign exchange fluctuations.
• A faster-than-expected pace of mainland store closures could affect revenue scale and market coverage.

What to watch

• Whether 2QFY27 same-store sales growth can continue.
• Whether net store closures in mainland China continue to exceed expectations.
• Whether Hong Kong and Macau gold product sales remain above normal levels.
• Whether the strategy to increase the fixed-price jewelry mix is delivered.
• Chow Tai Fook's 1QFY27 operating data and its validation of the industry recovery.
• The impact of gold prices, exchange rates, and tourist flows on jewelry consumption.